Taking another “random walk”

Posted by on September 10, 2010 @ 10:00 am in Investing

I recently had the chance to reread A Random Walk Down Wall Street by Burton Malkiel as part of a work-related book club.

Having read the book in a business school class very early in my career, I promptly ignored its advice and became a securities analyst (a profession about which he makes a few disparaging remarks!) charged with analyzing companies and making buy-and-sell recommendations. I was guilty of most of the shortcomings Dr. Malkiel points to (for example, trying to pick winners), but at least I got to visit an oil rig in the Gulf of Mexico. It took me a while to recognize the futility of my role, but I did eventually move on. Now I’m on the other side of my career. And in the rereading, I was struck by the book’s message in a way that escaped me the first time around.

While A Random Walk’s main premise is the difficulty investors have in outperforming the market, there are several other interesting aspects I think are worth mentioning. The first is that human nature doesn’t appear to change over time, nor do we learn from our mistakes. Malkiel devotes a fair amount of time documenting the various investment bubbles that have occurred through history, from the tulip bulb mania in Holland in the early 1600s to the dot-com obsession in the late ’90s. Although the current edition was completed in June 2006, the subsequent housing bubble and bust has given us another example of this behavior—and probably has Prof. Malkiel already thinking about penning an eighth edition.

On a related note, Malkiel addresses the behavioral component to our investment decisions and the role emotion can play. Overconfidence in our abilities as investors and the illusion of control where there is none are two examples.

Finally, Dr. Malkiel distills the book’s message into what is, for me, the essence of successful investing: the importance of broad diversification, the dominant role of investment costs in determining an investor’s success, and the importance of minimizing mistakes as a means of preserving wealth.

So, better late than never. I wonder what other books I should read again?

Note: All investing is subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market.

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